Argentina cenbank faces peso test ahead of fraught election

Treasury minister resigns, says ‘significant renewal’ needed

BUENOS AIRES, Aug 18, (RTRS): Argentina’s central bank must toe a politically fraught line between supporting the peso without blasting through the bank’s reserves, as policymakers seek to salvage the currency ahead of October’s presidential election, analysts said on Friday.

The peso was in free-fall for most of this week after a shock primary election result on Sunday, when center-left presidential candidate Alberto Fernandez trounced center-right President Mauricio Macri.

The scale of Fernandez’s victory suggested he could win the upcoming ballot in the first round, but potentially be left as leader of a country that has very few foreign reserves left, raising the chances of a debt default.

On Friday afternoon, in a fresh headache for Argentine policymakers, Fitch downgraded Argentina’s sovereign debt rating from “B” to “CCC,” flagging an increased likelihood of a default.

“One strategic element for the government and the opposition is how the current reserves of the central bank are used,” consultancy Fundacion Mediterranea said in a note. “The opposition does not want the current administration to leave the central bank with very few reserves, and it is convenient for the government that the proposals announced by the opposition are reasonable for the markets.”

The peso’s collapse, which comes amid growing fears of a global recession, forced the central bank to sell dollars and oblige private banks to trim their dollar holdings in order to provide liquidity to the market. The new dollar holdings rule unleashed about $400 million, traders said, and helped stabilize the peso on Thursday and Friday.

Since Sunday’s vote, the central bank has auctioned a total of $503 million.

The central bank, which is nominally independent but has long been prone to executive interference, has about $66 billion in reserves, of which about $20 billion are free resources that can used to pay debt and stabilize the peso, according to an Argentine government official.

In its statement, Fitch said the central bank’s interventions had so far been modest, allowing for more

File photo shows a man entering an exchange house in Buenos Aires, Argentina. Fitch has downgraded

Argentina’s sovereign debt rating from ‘B’ to ‘CCC’, flagging an increased likelihood of a default. (AP)

aggressive action down the road if needed.

“Nevertheless, the recent currency run and risks of further pressure and volatility are detrimental for sovereign debt sustainability, which had previously been predicated on expectations of a real peso appreciation,” Fitch warned, while also highlighting risks to growth and inflation.

The peso strengthened 4.36% on Friday to 55 pesos per dollar, giving policymakers a bit of breathing room. But it ended the week 17.58% weaker, and it is down almost a third against the greenback so far in 2019.

In a note, Citi said Macri will want the central bank to continue using reserves to defend the peso. A further currency collapse could be the final nail in his re-election chances.

“Fernandez is the big favorite to win the elections. But with Macri and Fernandez still in campaign mode, the transition will be difficult, with little incentive to calm the markets,” Citi said in a note.

That leaves Fernandez in a bind, relying on a Macri-controlled central bank to deliver him a country with both healthy reserves and a healthy currency. As such, some analysts suggested he could lessen his reliance on the central bank by doing a better job of communicating with investors.

“The initial signals (from Fernandez) have all been worrisome with no apparent understanding of basic economic principles through the populist campaign rhetoric and no sensitivity to the recent financial stress,” Amherst Pierpont Securities said in a note.

In an attempt to salvage his reelection bid and breathe life into Argentina’s recession-battered economy, Macri on Thursday froze sales taxes of 21 percent on basic foodstuffs until the end of the year. The government estimated the tax freeze will cost about 10 billion pesos ($174.2 million).

The shelving of the taxes was the boldest in a series of fiscal loosening measures totaling hundreds of millions of dollars that Macri has unveiled since the primary vote. But it was an awkward about-turn for a president who took office in 2015 vowing to slash public subsidies and correct what he called years of leftist economic mismanagement.

Meanwhile, Argentina’s Treasury Minister Nicolas Dujovne has resigned, saying in a letter seen by Reuters on Saturday he believed the government needed “significant renewal” in its economic team amid a crisis which saw the peso plunge this week.

Dujovne said in a letter to Argentine President Mauricio Macri that he had given his “all” to the job, helped tame a significant deficit and trim public spending.

“We have made mistakes as well, without a doubt, we never hesitate to recognize that and did all that was possible to correct them,” he added.

“I believe my resignation is in keeping with my place in a government_ that listens to the people and acts accordingly,” he added.

Macri has appointed Hernan Lacunza, the current economy minister for Buenos Aires province, as Dujovne’s replacement, a government source told Reuters.

Argentina’s peso was in free-fall for most of this week after a shock primary election result on Sunday, when centre-left Peronist candidate Alberto Fernandez trounced centreright Macri, in what was widely seen as a referendum on the government’s seeking of a loan from the International Monetary Fund and austerity measures it took as a condition for the loan.

The peso depreciated 21% by the end of the week and on Friday, in a fresh blow to Macri, ratings agencies Fitch and S&P downgraded Argentina_s sovereign debt rating, raising the specter of a default as the October election approaches.

Lacunza is the former general manager of Argentina_s Central Bank and also of the Buenos Aires City Bank.